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In
most states, the 2016 individual income tax season is winding down. Perhaps you filed your
return expecting to hear that you had dutifully paid all of your taxes, but
what you are about to read may shatter your expectations. In addition to any potential
income tax liabilities that you may have incurred in 2016, anyone who purchased
tangible property on-line for delivery or use in their home state may find themselves
owing use tax on those purchases.

For
anyone unfamiliar with a use tax, states impose it on the privilege of
ownership, possession, use, storage or consumption of tangible personal
property or taxable services. The use tax is a complement to the sales tax;
when a seller doesn’t collect sales tax on a taxable transaction, the buyer is
supposed to pay use tax on the goods in his or her state. This
arrangement serves to prevent in-state residents and businesses from traveling
outside of their state in order to avoid paying state sales tax on purchases of
otherwise taxable tangible personal property. The use tax mirrors the state
sales tax in that it is generally assessed against the same tax base at the
same rate.

Internet
purchases are a great way to illustrate how use tax liabilities may arise. For
example, imagine that, after scouring the web for this year’s fashion trends, you
learn that the ‘80s are back and you purchase
‘80s wear from an out-of-state seller while online. If you are living in
Virginia, where clothing is taxable, and you purchase your clothing from a
retailer in California (who does not collect sales tax from you because he has
no physical presence in Virginia), you are required to report the use tax due
on line 35 of your Virginia return, Form 760, and pay the amount due. The same would be true
you traveled to Oregon and purchased jewelry (that you intend to rock with your
‘80s gear when you get back home). Oregon does not impose a sales tax,[1] but Virginia does, meaning
your annual income tax return should also reflect your use tax obligation at
line 35.

If,
as you are reading this, you are wondering, “how do states enforce use tax?”
you are not alone. It seems the answer is even elusive for state taxing
authorities as e-commerce becomes the preferred
method for buying goods and services that are commonly taxable among states.
Rather than attempting to track down individual purchasers and consumers of
goods, the states generally focus their attention on enforcing the tax collection
obligation on sellers, both in-state and out-of-state, who have physical
presence in the state. Sometimes the states’ enforcement efforts might be
viewed as rather creative or inventive (like finding physical presence for
sellers placing internet “cookies” on in-state computers).

South
Dakota, for instance, requires out-of-state sellers without physical presence
to collect and remit sales tax if the seller earned more than $100,000 in gross
revenue from sales of tangible personal property, electronic products or services
delivered the state in the previous or current calendar year. Alternatively, if
the out-of-state retailer sells these classes of goods or services in more than
200 separate transactions, they are also treated as if they have nexus and
required to collect South Dakota sales tax. For the sake of example, if
Virginia passed the same law, and I purchased my ‘80s wear from a California
retailer who satisfied the economic nexus requirements, that retailer would be
required to collect Virginia sales tax at the time I made my purchase, and I
would no longer be liable for use tax. While South Dakota’s rule is currently
being contested in court, a finding in
favor of the state will likely have a significant impact on remote sellers if other
states decide to follow suit.

Clearly,
coming up with solutions to capture sales and use tax revenue is no simple task.
These days, consumers can easily purchase goods from anywhere in the world,
making it likely that use-tax policing will be cost-prohibitive and states will
continue to focus their efforts on overcoming limitations associated with
physical presence requirements.

[1] If
the buyer were physically present in a state that imposed sales tax on jewelry
in this example, that state’s sales tax would be collected at the time of
payment despite the fact that the buyer is an out-of-state resident.

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